Rachel is a financial investor who actively buys and sells in the securities market. Now she has a portfolio of all blue chips, including: $13,500 of Share A, S7,600 of Share B, $14,700 of Share C, and $5,500 of Share D. Required: a) Compute the weights of the assets in Rachel's portfolio? . b) If Rachel's portfolio has provided her with returns of 9.7%, 12.4%, -5.5% and 17.2% over the past four years, respectively, calculate the geometric average return of the portfolio for this period. c) Assume that expected return of the stock A in Rachel's portfolio is 13.6% this year. The risk premium on the stocks of the same industry are 4.8%, betas of these stocks is 1.5 and the inflation rate was 2.7%. Calculate the risk-free rate of return using Capital Market Asset Pricing Model (CAPM). d) Following is forecast for economic situation and Rachel's portfolio returns next year, calculate the expected return, variance and standard deviation of the portfolio.(
Rachel is a financial investor who actively buys and sells in the securities market. Now she has a portfolio of all blue chips, including: $13,500 of Share A, S7,600 of Share B, $14,700 of Share C, and $5,500 of Share D. Required: a) Compute the weights of the assets in Rachel's portfolio? . b) If Rachel's portfolio has provided her with returns of 9.7%, 12.4%, -5.5% and 17.2% over the past four years, respectively, calculate the geometric average return of the portfolio for this period. c) Assume that expected return of the stock A in Rachel's portfolio is 13.6% this year. The risk premium on the stocks of the same industry are 4.8%, betas of these stocks is 1.5 and the inflation rate was 2.7%. Calculate the risk-free rate of return using Capital Market Asset Pricing Model (CAPM). d) Following is forecast for economic situation and Rachel's portfolio returns next year, calculate the expected return, variance and standard deviation of the portfolio.(
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Transcribed Image Text:Rachel is a financial investor who actively buys and sells in the securities market. Now she has a
portfolio of all blue chips, including: $13,500 of Share A, S7,600 of Share B, $14,700 of Share C, and
$5,500 of Share D.
Required:
a) Compute the weights of the assets in Rachel's portfolio? .
b) If Rachel's portfolio has provided her with returns of 9.7%, 12.4%, -5.5% and 17.2% over the past
four years, respectively, calculate the geometric average return of the portfolio for this period.
c) Assume that expected return of the stock A in Rachel's portfolio is 13.6% this year. The risk
premium on the stocks of the same industry are 4.8%, betas of these stocks is 1.5 and the inflation
rate was 2.7%. Calculate the risk-free rate of return using Capital Market Asset Pricing Model
(CAPM).
d) Following is forecast for economic situation and Rachel's portfolio returns next year, calculate the
expected return, variance and standard deviation of the portfolio.(
Expert Solution
Step 1 Note
As per company policy it is only possible to solve 3 sub parts.
Step 2 Introduction
Weights of assets mean the percentage of assets in a portfolio.
CAPM tells the relationship between assets and risk for risky securities.
Step 3 Calculation of weights
Calculation of weights is as follows:
Total weight = value of share A + value of share B + value of share c + value of share D
= 13500+7600+14700+5500
= 41300
Weight of A = 13500/41300
= 32.68%
Weight of B = 7600/41300
= 18.04%
Weight of C = 14700/41300
= 35.59%
Weight of D = 5500/41300
= 13.31%
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